How Bonds Work — The Nuts and Bolts

When you think about bond investing you usually think "retiree-income", "boring", "non-glamorous".

Do bonds have a place within a stock investing framework? Is this an investment vehicle you should consider?

Let's find out by taking an in-depth look at exactly how bonds work.

What Are Bonds?

We'll start by answering this fundamental question first. Let's see what exactly bonds are and how they come into being.....

A Brief History of Government Bonds

Public borrowing can be traced back to the 12th century Venetians (citizens of the then Republic of Venice). The state issued interest-bearing debt which was secured by salt ... a state-owned monopoly.

However, it wasn't until the 16th century that government debt actually became mainstream. The Dutch Republic needed to finance their war of independence against Spain. In order to raise money, the government issued bonds secured by specific tax revenues or the general credibility of the state.

One of the biggest debt issuance of the 20th century was done by the US government to raise money during World Wars 1 and 2. These types of bonds were called War Bonds.... issued with the specific intention of financing the war. If the government hadn't taken on this debt, the other main option it had was to steeply raise taxes.

The government issued Liberty Bonds during WW1 and Defense Bonds (series E, F, G) during WW2.

In the early 1940s, in order to persuade people to purchase these bonds, a tremendous advertising campaign was launched. Famous Hollywood celebrities promoted these bonds at bond rallies.

Today, most major governments and corporations issue bonds as an essential means of funding their operations.

Stocks versus Bonds

Now that you're familiar with how bonds work, let's move on to a discussion of stocks versus bonds. We'll look at the key differences in the ownership of these two instruments and tell you when it's appropriate to own bonds ....

To wrap up, we looked at how exactly bonds work and the different types of bonds.

We briefly traced the history of government bonds and concluded with a stocks versus bonds comparison to see if bonds are something we should own.

We wish you luck in applying the valuable learnings in this section.

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